Hollywood copes with tech frets

Films try to avoid music download pitfalls

Nearly five years after the launch of iTunes, music execs are in more of a panic than ever. Due in part to online file-sharing and casual sharing of burned CDs among friends, album sales fell 20% this year and digital downloads, while growing, aren’t nearly enough to make up the difference.

The movie business isn’t feeling the same pain — yet. But in a few years, when any tech-savvy person will be able to download a movie in 20 minutes, store it on a huge hard drive, and watch it on their ‘Net-connected TV, the music business’s problems may look eerily familiar.

Folks in the movie biz are bullish on the prospects of downloading films. But so far, there is no uniform system. Movies downloaded from Wal-Mart.com won’t work with the new Apple TV. And forget about watching a movie downloaded from iTunes on a Sony PSP.

This problem will undoubtedly be a factor in holding back the growth of the digital market. The problem would be eliminated by getting rid of DRM, or digital rights management — software that sets rules on legally downloaded content and prevents endless copying.

But if DRM is eliminated, that may open the floodgates to piracy. With revenues falling, the music biz is currently weighing the costs and benefits of DRM. And film execs are watching their music counterparts, aware that whatever happens in the music biz will have implications for them down the road.

In February, Steve Jobs wrote an open letter calling for the music industry to let iTunes sell songs without DRM. Though many called the letter self-serving — Apple is under pressure from many European governments to alter or drop its proprietary DRM system — it sparked a huge debate in the music biz.

It also left many in Hollywood wondering: If DRM disappears for music, can it still be justified for video?

The next day, Jobs called execs at several major studios with his answer.

According to insiders, he reassured them that video is different and Apple isn’t looking to sell TV shows and movies without DRM.

Nonetheless, many in the film biz say the letter sparked a debate about the status quo in digital downloads.

“Steve Jobs’ letter, while flawed, served as a valuable wake-up call to content providers,” says Ron Wheeler, senior VP of content protection at Fox. “It told us that we can’t take DRM for granted, that we need to pay more attention to selling consumers on the benefits of DRM and to making it work better for them.”

But questions remain in all corners of the entertainment biz. While it’s impossible to determine how much piracy would increase without DRM, the increasing number of songs and movies available to illegally download show that it’s not doing much to stop anybody who really wants to get past it.

“We need speedbumps to encourage legal behavior and sustain a marketplace,” says Recording Industry Assn. prexy Mitch Bainwol, who argues that his industry loses huge amounts of business through casual burning for friends, not just Internet pirates. “The notion that because you don’t have a perfect solution you shouldn’t have any solution is to me not a sustainable argument.”

But critics smell hypocrisy.

“DRM is not only useless against piracy, but it’s counter-productive because it gives otherwise legitimate consumers one more reason to prefer the illegitimate copy,” says Fred von Lohman, senior intellectual property attorney at the Electronic Frontier Foundation and a prominent DRM critic.

Even the most ethical consumers might prefer a pirated movie or song because it works with most digital devices.

Perhaps the biggest problem facing the legal download market — and a major inhibitor of its growth — is the lack of interoperability, i.e., the fact that legal downloads only work on certain devices, because most DRM sofware is proprietary.

DRM detractors — many of whom have an economic interest in its elimination — are newly emboldened on the music front. There are calls for the elimination of DRM from execs at companies like RealNetworks and Yahoo!, which would benefit tremendously if DRM disappeared and they could sell music that plays on the iPod.

Virtually all in the industry agree that change is coming sooner rather than later, but it’s not yet clear when it will come.

Some major labels are starting to experiment with legal music in the open MP3 format.

Both EMI and Hollywood Records have sold a few DRM-free songs via Yahoo!. EMI this year also flirted with the idea of selling its entire catalog in MP3 via several major Web sites, but backed out, because it thought it should get paid more for music without anti-piracy restrictions.

“Our position has always been that they should give us some stuff from the back catalog that isn’t selling on iTunes and see if we can create some upside. We’re not asking for Jay-Z, but it doesn’t seem that the Clash’s second album needs DRM anymore,” says David Pakman, prexy of digital musicstore eMusic, which sells songs from indie labels without DRM.

Studio execs say they dislike the fact that there are several different DRM systems that are incompatible. They’re working on intercompany alliances — the most prominent of which is named the Coral Consortium — to find a solution that includes content owners, software makers and manufacturers.

“We completely support portability and interoperability,” says Darcy Antonellis, SVP worldwide anti-piracy operations for Warner Bros. “Those of us on the content side and those in the (software and consumer electronics) industries all have a responsibility to enable it in a way that’s transparent to consumers, but stops people from doing things they didn’t pay for.”

Essentially, studios would love to see the digital download biz end up like DVDs, where every player reads and protects every disc, but tougher to break.

However studios have proven unable to force or cajole the tech world to reach a solution.

Some critics even point out that, in the short run at least, the lack of interoperability may help studios. After all, if a consumer buys a second copy of “Jackass” for his PSP because he can’t transfer the DVD he already owns onto it, Paramount just sold him the same movie twice.

But in the long run, critics and DRM-backers alike agree that making consumers buy the same movie twice won’t stand. Once bandwidth grows and hard drives get bigger, consumers will feel much more justified downloading an illegal copy of a movie they already own just to get it to work on their new device.

“Kids under 30 are not going to buy the same content over and over,” says Sony Pictures chief technology officer Mitch Singer. “They think differently about what ownership means (and) are going to find a way to get it if they think they are justified.”

The only exception, he notes, could be higher-quality versions. A consumer may be willing to pay more to get a high-def copy of a film to play on DVD but not to get a lower-quality copy that plays on a tiny-screened portable device.

The solution that Singer is hoping for, and says industryites are discussing, is essentially an independent provider — possibly owned by the studios, or not — that would let digital download stores sell movies in any format.

Rather than forcing Microsoft and Apple to make their DRM interoperable — an unlikely outcome so long as both companies rely on devices that use their proprietary software to make a profit — such a scheme would let consumers get the version they want, and swap it out if they need a new one.

“It’s important,” says Singer, “that we that we develop a healthy digital market that works seamlessly for consumers and will help us develop new businesses in the future.”